One Year Later: What has changed, and what hasn't

A year after Lehman Brothers declared bankruptcy and turned a credit crunch largely confined to Wall Street into a full-blown global economic crisis, it's worth considering how much has changed -- and how much hasn't.

Notwithstanding last fall's headlines declaring the death of Wall Street, it's easy to find old problems that are still simmering, as well as recent changes that may or may not be for the best. For a review of some of the key changes in the financial world in the last year, see below.

The big changes:

* The weakest Wall Street firms have disappeared. Lehman Brothers failed. Bear Stearns and Merrill Lynch were sold to rapacious rivals. And the end result was fewer firms to compete for lucrative business underwriting equity offerings and providing deal advice. Consider that several big commercial banks, including Washington Mutual, National City and Wachovia, have all been devoured, too, and the financial sector is much smaller today than it was last summer.

* Uncle Sam reaches into CEOs' wallets. Kenneth Feinberg, Obama's "pay czar," will rule this fall on executive compensation at a handful of big companies benefiting from Washington's largesse. Whether he slashes pay checks or tries to rearrange priorities to focus more on sustainable growth than short-term profits, Feinberg's decisions are sure to be controversial.
* Big banks return to profitability. According to data compiled by Thomson Reuters, earnings at financial companies in the S&P 500 are expected to grow faster than those of any other sector in the benchmark index. The aforementioned trading revenues are part of that. But through programs designed to slay the credit crisis, the government has set the stage for firms to make money by the truckload.

* Contempt for bankers is on the rise. A Gallup poll earlier this year found that just 23 percent of Americans say bankers are highly ethical, the lowest-ever rating of the profession's honesty. What's worse, though, is that most people take an increasingly dim view of the financial industry as a whole: Just 32 percent of those polled said they're confident in banks, down 9 percentage points from 2007.

* Taxpayers become owners. Thanks to the past year's bailouts, the government now owns enough of Citigroup (C), General Motors, Chrysler and AIG (AIG) to call the shots at those companies. And Fannie Mae (FNM) and Freddie Mac (FRE) are in government-run conservatorships, giving Washington a huge role in shaping their futures. How those interventions end will be just as important, if not more, as how they began.

Just as interesting, here are some the things that have not changed:

* Wall Street's titans are still too big to fail. In fact, the biggest U.S. banks are only getting bigger. JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) each hold more than 10 percent of the nation's bank deposits, a threshold that financial institutions were discouraged from crossing.

* The lords of high finance still wield vast power. Financial firms are second only to health care companies in the amount of money they've spent lobbying the federal government this year, according to the Center for Responsive Politics. They've shelled out $222.7 million. That's lower than last year, but Wall Street is still spending a fortune to bend Washington's ear.

* Many "financial weapons of mass destruction" are still armed. That's what uber-investor Warren Buffett called the tangle of derivatives transactions that help make one firm's struggles a potential threat to the entire financial system. And they're still ticking. President Obama wants to set up an authority to clear trades in derivatives like the credit default swaps, but it hasn't been put in place yet. Some observers fear it may not be enough.

* Toxic assets are still toxic. Whether it's subprime mortgages packaged into bonds that make up collateralized debt obligations, construction loans for subdivisions that may never be built or commercial real estate portfolios made up of empty office buildings, banks still have plenty of exposure to hard-to-value investments. And changes to accounting rules may be masking losses.

* Risk-taking is still too prevalent. Goldman Sachs (GS) and JPMorgan, among others, have seen trading income soar this year. And along with bigger profits has come more risk. The five biggest financial firms' one-day potential for trading losses topped $1 billion in the second quarter, up 76 percent from two years ago, according to SEC documents.